form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
S
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended November 3, 2007
or
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from __________ to __________
Commission
File Number 1-8897
BIG
LOTS, INC.
(Exact
name of registrant as specified in its charter)
Ohio
|
06-1119097
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
300
Phillipi Road, P.O. Box 28512, Columbus, Ohio
|
43228-5311
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(614)
278-6800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check One):
Large
accelerated filer S
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of the registrant’s common shares, $0.01 par value, outstanding as of
November 30, 2007, was 90,407,928.
FORM
10-Q
FOR
THE FISCAL QUARTER ENDED NOVEMBER 3, 2007
TABLE
OF CONTENTS
|
Page
|
|
2
|
|
|
|
2
|
|
|
a)
|
|
2
|
|
|
|
b)
|
|
3
|
|
|
|
c)
|
|
4
|
|
|
|
d
)
|
|
5
|
|
|
|
e
)
|
|
6
|
|
|
|
|
14
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
|
|
23
|
|
|
|
23
|
Consolidated
Statements of Operations (Unaudited)
(In
thousands, except per share
amounts)
|
|
|
Thirteen
Weeks Ended
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
November
3, 2007
|
|
|
October
28, 2006
|
|
|
November
3, 2007
|
|
|
October
28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,030,638
|
|
|
$ |
1,049,537
|
|
|
$ |
3,243,928
|
|
|
$ |
3,197,694
|
|
Cost
of sales
|
|
|
618,832
|
|
|
|
634,192
|
|
|
|
1,964,135
|
|
|
|
1,931,734
|
|
Gross
margin
|
|
|
411,806
|
|
|
|
415,345
|
|
|
|
1,279,793
|
|
|
|
1,265,960
|
|
Selling
and administrative expenses
|
|
|
367,806
|
|
|
|
388,041
|
|
|
|
1,116,315
|
|
|
|
1,160,546
|
|
Depreciation
expense
|
|
|
21,268
|
|
|
|
24,988
|
|
|
|
64,860
|
|
|
|
74,568
|
|
Operating
profit
|
|
|
22,732
|
|
|
|
2,316
|
|
|
|
98,618
|
|
|
|
30,846
|
|
Interest
expense
|
|
|
(235 |
) |
|
|
(185 |
) |
|
|
(432 |
) |
|
|
(390 |
) |
Interest
and investment income
|
|
|
578
|
|
|
|
61
|
|
|
|
5,180
|
|
|
|
1,209
|
|
Income
from continuing operations before income taxes
|
|
|
23,075
|
|
|
|
2,192
|
|
|
|
103,366
|
|
|
|
31,665
|
|
Income
tax expense
|
|
|
8,702
|
|
|
|
373
|
|
|
|
37,834
|
|
|
|
10,638
|
|
Income
from continuing operations
|
|
|
14,373
|
|
|
|
1,819
|
|
|
|
65,532
|
|
|
|
21,027
|
|
Income
(loss) from discontinued operations, net of tax expense (benefit) of
$(48), $(1,097), $581, and $(1,773), respectively
|
|
|
(75 |
) |
|
|
(85 |
) |
|
|
914
|
|
|
|
(1,281 |
) |
Net
income
|
|
$ |
14,298
|
|
|
$ |
1,734
|
|
|
$ |
66,446
|
|
|
$ |
19,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.14
|
|
|
$ |
0.02
|
|
|
$ |
0.62
|
|
|
$ |
0.19
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
|
(0.01 |
) |
|
|
$ |
0.14
|
|
|
$ |
0.02
|
|
|
$ |
0.63
|
|
|
$ |
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.14
|
|
|
$ |
0.02
|
|
|
$ |
0.61
|
|
|
$ |
0.19
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
|
(0.01 |
) |
|
|
$ |
0.14
|
|
|
$ |
0.02
|
|
|
$ |
0.62
|
|
|
$ |
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
101,188
|
|
|
|
108,239
|
|
|
|
105,866
|
|
|
|
110,750
|
|
Dilutive
effect of share-based awards
|
|
|
1,055
|
|
|
|
1,656
|
|
|
|
1,329
|
|
|
|
1,214
|
|
Diluted
|
|
|
102,243
|
|
|
|
109,895
|
|
|
|
107,195
|
|
|
|
111,964
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Balance Sheets
(In
thousands, except par
value)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
November 3,
2007
|
|
|
February 3,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
41,776
|
|
|
$ |
281,657
|
|
Inventories
|
|
|
989,742
|
|
|
|
758,185
|
|
Deferred
income taxes
|
|
|
65,006
|
|
|
|
60,292
|
|
Other
current assets
|
|
|
65,989
|
|
|
|
48,913
|
|
Total
current assets
|
|
|
1,162,513
|
|
|
|
1,149,047
|
|
Property
and equipment - net
|
|
|
491,780
|
|
|
|
505,647
|
|
Deferred
income taxes
|
|
|
50,443
|
|
|
|
45,057
|
|
Other
assets
|
|
|
22,308
|
|
|
|
20,775
|
|
Total
assets
|
|
$ |
1,727,044
|
|
|
$ |
1,720,526
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
386,981
|
|
|
$ |
193,996
|
|
Property,
payroll, and other taxes
|
|
|
69,186
|
|
|
|
93,706
|
|
Accrued
operating expenses
|
|
|
117,879
|
|
|
|
58,815
|
|
Insurance
reserves
|
|
|
38,257
|
|
|
|
43,518
|
|
KB
bankruptcy lease obligation
|
|
|
8,768
|
|
|
|
12,660
|
|
Accrued
salaries and wages
|
|
|
34,884
|
|
|
|
43,515
|
|
Other
current liabilities
|
|
|
13,914
|
|
|
|
28,022
|
|
Total
current liabilities
|
|
|
669,869
|
|
|
|
474,232
|
|
Long-term
obligations
|
|
|
138,900
|
|
|
|
-
|
|
Deferred
rent
|
|
|
32,604
|
|
|
|
37,801
|
|
Insurance
reserves
|
|
|
43,961
|
|
|
|
44,238
|
|
Unrecognized
tax benefits
|
|
|
31,052
|
|
|
|
-
|
|
Other
liabilities
|
|
|
35,386
|
|
|
|
34,552
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
shares - authorized 2,000 shares; $0.01 par value; none
issued
|
|
|
-
|
|
|
|
-
|
|
Common
shares - authorized 298,000 shares; $0.01 per value; issued 117,495
shares; outstanding 95,832 shares and109,633 shares,
respectively
|
|
|
1,175
|
|
|
|
1,175
|
|
Treasury
shares - 21,633 shares and 7,862 shares, respectively, at
cost
|
|
|
(554,736 |
) |
|
|
(124,182 |
) |
Additional
paid-in capital
|
|
|
488,824
|
|
|
|
477,318
|
|
Retained
earnings
|
|
|
845,556
|
|
|
|
781,325
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(5,547 |
) |
|
|
(5,933 |
) |
Total
shareholders' equity
|
|
|
775,272
|
|
|
|
1,129,703
|
|
Total
liabilities and shareholders' equity
|
|
$ |
1,727,044
|
|
|
$ |
1,720,526
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BIG
LOTS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Unearned
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- January 28, 2006
|
|
|
113,932
|
|
|
$ |
1,175
|
|
|
|
3,563
|
|
|
$ |
(48,294 |
) |
|
$ |
(2,114 |
) |
|
$ |
470,677
|
|
|
$ |
657,280
|
|
|
$ |
-
|
|
|
$ |
1,078,724
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
19,746
|
|
|
|
-
|
|
|
|
19,746
|
|
Adjustment
due to SFAS No. 123(R)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,114
|
|
|
|
(2,114 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchases
of common shares
|
|
|
(8,746 |
) |
|
|
-
|
|
|
|
8,746
|
|
|
|
(134,169 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(134,169 |
) |
Structured
share repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
Exercise
of stock options
|
|
|
3,340
|
|
|
|
-
|
|
|
|
(3,340 |
) |
|
|
47,685
|
|
|
|
-
|
|
|
|
(7,034 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
40,651
|
|
Tax
benefit from share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,203
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,203
|
|
Treasury
shares used for matching contributions to savings
plan
|
|
|
404
|
|
|
|
-
|
|
|
|
(404 |
) |
|
|
5,589
|
|
|
|
-
|
|
|
|
(415 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
5,174
|
|
Sale
of treasury shares used for deferred compensation
plan
|
|
|
70
|
|
|
|
-
|
|
|
|
(70 |
) |
|
|
658
|
|
|
|
-
|
|
|
|
517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,175
|
|
Share-based
employee compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,881
|
|
Balance
- October 28, 2006
|
|
|
109,000
|
|
|
|
1,175
|
|
|
|
8,495
|
|
|
|
(128,531 |
) |
|
|
-
|
|
|
|
471,342
|
|
|
|
677,026
|
|
|
|
-
|
|
|
|
1,021,012
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,299
|
|
|
|
-
|
|
|
|
104,299
|
|
Adjustment
due to SFAS No. 158
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,933 |
) |
|
|
(5,933 |
) |
Purchases
of common shares
|
|
|
(715 |
) |
|
|
-
|
|
|
|
715
|
|
|
|
(16,281 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,281 |
) |
Structured
share repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of stock options
|
|
|
1,332
|
|
|
|
-
|
|
|
|
(1,332 |
) |
|
|
20,443
|
|
|
|
-
|
|
|
|
(3,575 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
16,868
|
|
Tax
benefit from share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,695
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,695
|
|
Sale
of treasury shares used for deferred compensation
plan
|
|
|
16
|
|
|
|
-
|
|
|
|
(16 |
) |
|
|
187
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
339
|
|
Share-based
employee compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,704
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,704
|
|
Balance
- February 3, 2007
|
|
|
109,633
|
|
|
|
1,175
|
|
|
|
7,862
|
|
|
|
(124,182 |
) |
|
|
-
|
|
|
|
477,318
|
|
|
|
781,325
|
|
|
|
(5,933 |
) |
|
|
1,129,703
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,446
|
|
|
|
-
|
|
|
|
66,446
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of pension, net of tax of $246
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
386
|
|
|
|
386
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,832
|
|
Adjustment
due to FIN 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,215 |
) |
|
|
-
|
|
|
|
(2,215 |
) |
Purchases
of common shares
|
|
|
(16,899 |
) |
|
|
-
|
|
|
|
16,899
|
|
|
|
(484,355 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(484,355 |
) |
Exercise
of stock options
|
|
|
2,734
|
|
|
|
-
|
|
|
|
(2,734 |
) |
|
|
46,428
|
|
|
|
-
|
|
|
|
(10,607 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
35,821
|
|
Restricted
shares awarded
|
|
|
284
|
|
|
|
-
|
|
|
|
(284 |
) |
|
|
6,596
|
|
|
|
-
|
|
|
|
(6,596 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Tax
benefit from share-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,794
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,794
|
|
Sale
of treasury shares used for deferred compensation
plan
|
|
|
80
|
|
|
|
-
|
|
|
|
(80 |
) |
|
|
777
|
|
|
|
-
|
|
|
|
1,598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,375
|
|
Share-based
employee compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,317
|
|
Balance
- November 3, 2007
|
|
|
95,832
|
|
|
$ |
1,175
|
|
|
|
21,663
|
|
|
$ |
(554,736 |
) |
|
$ |
-
|
|
|
$ |
488,824
|
|
|
$ |
845,556
|
|
|
$ |
(5,547 |
) |
|
$ |
775,272
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
Thirty-Nine
Weeks Ended
|
|
|
|
November
3, 2007
|
|
|
October
28, 2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
66,446
|
|
|
$ |
19,746
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
60,719
|
|
|
|
70,367
|
|
Deferred
income taxes
|
|
|
(7,465 |
) |
|
|
(16,346 |
) |
Loss
on disposition of equipment
|
|
|
1,937
|
|
|
|
566
|
|
Employee
benefits paid with common shares
|
|
|
-
|
|
|
|
5,174
|
|
KB
Toys matters
|
|
|
(1,360 |
) |
|
|
-
|
|
Non-cash
share-based compensation expense
|
|
|
7,317
|
|
|
|
2,881
|
|
Non-cash
impairment charges
|
|
|
-
|
|
|
|
1,534
|
|
Pension
|
|
|
1,150
|
|
|
|
2,829
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(231,557 |
) |
|
|
(158,648 |
) |
Accounts
payable
|
|
|
192,985
|
|
|
|
133,619
|
|
Current
income taxes
|
|
|
(21,102 |
) |
|
|
11,210
|
|
Other
current assets
|
|
|
(9,188 |
) |
|
|
(4,793 |
) |
Other
current liabilities
|
|
|
(11,414 |
) |
|
|
4,657
|
|
Other
assets
|
|
|
(2,566 |
) |
|
|
(1,328 |
) |
Other
liabilities
|
|
|
(862 |
) |
|
|
1,297
|
|
Net
cash provided by operating activities
|
|
|
45,040
|
|
|
|
72,765
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(39,397 |
) |
|
|
(26,135 |
) |
Purchase
of short-term investments
|
|
|
(436,040 |
) |
|
|
(50,000 |
) |
Redemption
of short-term investments
|
|
|
436,040
|
|
|
|
50,000
|
|
Cash
proceeds from sale of equipment
|
|
|
1,294
|
|
|
|
879
|
|
Other
|
|
|
(15 |
) |
|
|
(69 |
) |
Net
cash used in investing activities
|
|
|
(38,118 |
) |
|
|
(25,325 |
) |
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term obligations
|
|
|
175,500
|
|
|
|
193,200
|
|
Payment
of long-term obligations, including capital lease
|
|
|
(36,965 |
) |
|
|
(162,600 |
) |
Proceeds
from the exercise of stock options
|
|
|
35,821
|
|
|
|
40,651
|
|
Excess
tax benefit from share-based awards
|
|
|
19,794
|
|
|
|
6,203
|
|
Structured
share repurchase
|
|
|
-
|
|
|
|
627
|
|
Payment
for treasury shares acquired
|
|
|
(443,328 |
) |
|
|
(134,169 |
) |
Treasury
shares sold for deferred compensation plan
|
|
|
2,375
|
|
|
|
1,175
|
|
Proceeds
from finance obligation
|
|
|
-
|
|
|
|
13,289
|
|
Net
cash used in financing activities
|
|
|
(246,803 |
) |
|
|
(41,624 |
) |
Increase
(decrease) in cash and cash equivalents
|
|
|
(239,881 |
) |
|
|
5,816
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
281,657
|
|
|
|
1,710
|
|
End
of period
|
|
$ |
41,776
|
|
|
$ |
7,526
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest, including capital leases
|
|
$ |
43
|
|
|
$ |
160
|
|
Cash
paid for income taxes, excluding impact of refunds
|
|
$ |
46,001
|
|
|
$ |
20,313
|
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
Assets
acquired under capital leases
|
|
$ |
2,855
|
|
|
$ |
-
|
|
Treasury
shares acquired, but not settled
|
|
$ |
41,027
|
|
|
$ |
-
|
|
Increase
in accrued property and equipment
|
|
$ |
11,972
|
|
|
$ |
1,530
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes
to Consolidated Financial Statements
(Unaudited)
|
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All
references in this report to “we,” “us,” or “our” are to Big Lots, Inc. and its
subsidiaries. We are the nation’s largest broadline closeout
retailer. At November 3, 2007, we operated 1,368 stores in 47
states. We manage our business on the basis of one segment, broadline
closeout retailing. We have historically experienced, and expect to
continue to experience, seasonal fluctuations, with a larger percentage of
our
net sales and operating profit realized in the fourth fiscal
quarter. We make available, free of charge, through the “Investor
Relations” section of our website (www.biglots.com) under the “SEC Filings”
caption, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (“Exchange Act”), as soon as reasonably practicable after we file such
material with, or furnish it to, the Securities and Exchange Commission
(“SEC”). The contents of our websites are not part of this
report.
The
accompanying consolidated financial statements and these notes have been
prepared in accordance with the rules and regulations of the SEC for interim
financial information. The consolidated financial statements reflect all normal
recurring adjustments which management believes are necessary to present fairly
our financial condition, results of operations, and cash flows for all periods
presented. These statements, however, do not include all information necessary
for a complete presentation of financial position, results of operations, and
cash flows in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Interim results may not
necessarily be indicative of results that may be expected for any other interim
period or for the year as a whole. The accompanying consolidated
financial statements and these notes should be read in conjunction with the
audited consolidated financial statements and notes included in our Annual
Report on Form 10-K for the fiscal year ended February 3, 2007 (the “2006 Form
10-K”).
Fiscal
Periods
We
follow
the concept of a 52-53 week fiscal year, which ends on the Saturday nearest
to
January 31. Unless otherwise stated, references to years in this report relate
to fiscal years rather than calendar years. Fiscal year 2007 (“2007”)
is comprised of the 52 weeks commenced on February 4, 2007 and ending on
February 2, 2008. Fiscal year 2006 (“2006”) was comprised of the 53
weeks commenced on January 29, 2006 and ended on February 3,
2007. The fiscal quarters ended November 3, 2007 (“third quarter of
2007”) and October 28, 2006 (“third quarter of 2006”) were both comprised of 13
weeks. The year to date periods ended November 3, 2007 (“year to date
2007”) and October 28, 2006 (“year to date 2006”) were both comprised of 39
weeks.
Selling
and Administrative Expenses
We
include store expenses (such as payroll and occupancy costs), warehousing
costs, distribution and outbound transportation costs to our stores,
advertising, purchasing, insurance, non-income taxes, and overhead costs
in
selling and administrative expenses. Selling and administrative
expense rates may not be comparable to those of other retailers that
include distribution and outbound transportation costs in cost of
sales. Distribution and outbound transportation costs included in
selling and administrative expenses were $47.7 million and $52.5 million
for the
third quarter of 2007 and the third quarter of 2006, respectively, and $149.1
million and $161.8 million for the year to date 2007 and the year to date
2006,
respectively.
Included
in selling and administrative expenses in the year to date 2007 was
approximately $4.5 million of insurance proceeds we received as recovery for
damages related to hurricanes occurring in 2005.
Included
in selling and administrative expenses in the third quarter of 2006 and the
year
to date 2006 was $9.7 million of charges to record the estimated settlement
of
liabilities for two employment-related civil actions (See Note 7 to these
consolidated financial statements for additional information).
Advertising
Expense
Advertising
costs, which were expensed as incurred, consisted primarily of print and
television advertisements, and were included in selling and administrative
expenses. Advertising expenses were $19.7 million and $18.1 million
for the third quarter of 2007 and the third quarter of 2006, respectively,
and
$66.0 million and $64.7 million for the year to date 2007 and the year to date
2006, respectively.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements. SFAS No. 157 addresses how companies should
approach measuring fair value when required by GAAP. SFAS No. 157
does not create or modify any GAAP requirements to apply fair value
accounting. The standard provides a single definition of fair value
that is to be applied consistently for all accounting applications and also
generally describes and prioritizes according to reliability the methods and
inputs used in valuations. SFAS No. 157 prescribes additional
disclosures regarding the extent of fair value measurements included in a
company’s financial statements and the methods and inputs used to arrive at
these values. SFAS No. 157 is effective on a prospective basis for us
in the first quarter of the fiscal year ending on January 31, 2009
(“2008”). We expect no significant impact on our financial condition,
results of operations, or liquidity from adopting this statement.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). We adopted the
recognition provisions of SFAS No. 158 in the fourth quarter of 2006, which
required us to reflect the funded status of our defined benefit pension plans
on
our consolidated balance sheet. Effective in 2008, we are required to
measure the defined benefit pension plans’ assets and obligations as of the date
of our year-end consolidated balance sheet. Currently, our pension
plans have a measurement date of December 31. Switching to a new
measurement date will require a one-time adjustment to retained earnings in
2008
per the transition guidance in SFAS No. 158. Even though we have not
yet determined the amount of this adjustment, we do not expect a significant
impact on our financial condition, results of operations, or liquidity from
adopting this statement.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS No. 159 will be effective at the beginning of
2008. We expect no significant impact on our financial condition,
results of operations, or liquidity from adopting this statement.
NOTE
2 – INCOME TAXES
In
July
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes, which was effective as of the beginning of
2007. FIN 48 is an interpretation of SFAS No. 109, Accounting for
Income Taxes, and clarifies the accounting for uncertainty in income tax
positions. FIN 48 requires us to recognize in our financial
statements the impact of a tax position, if that position is more likely than
not of being sustained, based on the technical merits of the
position.
The
recognition and measurement guidelines of FIN 48 were applied to all of our
material income tax positions as of the beginning of 2007, resulting in an
increase in our tax liabilities of $2.2 million with a corresponding decrease
to
beginning retained earnings for the cumulative effect of a change in accounting
principle. The total amount of unrecognized income tax benefits at
the beginning of 2007 was $38.3 million, of which $23.9 million would affect
our
annual effective income tax rate if recognized. The difference
between the total amount of unrecognized tax benefits and the amount that would
affect our effective income tax rate relates to deferred tax benefits for
temporary differences between book and tax return items and the federal tax
benefit of state income tax items. Included in the $38.3
million was $9.7 million of unrecognized tax benefits primarily related to
current and potential refund claims for welfare to work and work opportunity
tax
credits. If we prevail with respect to these claims, we would owe
approximately $1.9 million of fees, which have not been accrued, to an outside
service provider who assists us with administration of these refund
claims.
We
are
continuing to recognize interest and penalties related to uncertain income
tax
positions in our income tax expense. At the beginning of 2007,
interest and penalties of $7.4 million were accrued in addition to the $38.3
million of unrecognized tax benefits.
We
are
subject to U.S. federal income tax as well as income tax of multiple state
and
local jurisdictions. The examination of our 2002 U.S. federal income tax
return was concluded in the second quarter of 2007 and the statute of
limitations for our 2003 U.S. federal income tax return lapsed in the third
quarter of 2007. In addition, the state income tax returns filed by
us are subject to examination generally for periods beginning with 2002,
although state income tax carryforward attributes generated prior to 2002 may
still be adjusted upon examination. We have various state income tax
returns in the process of examination or administrative appeals.
There
was
no material change in the net amount of unrecognized tax benefits in the year
to
date 2007. We have estimated the reasonably possible expected net
change in unrecognized tax benefits through November 1, 2008 based on 1)
anticipated positions taken in the next 12 months, 2) expected settlements
or
payments of uncertain tax positions, and 3) lapses of the applicable statutes
of
limitations of unrecognized tax benefits. The estimated net decrease
in unrecognized tax benefits for the next 12 months is approximately $5
million. Actual results may differ materially from this
estimate.
The
effective income tax rate for the year to date 2007 income from continuing
operations was 36.6%, which benefited from the reduction in a valuation
allowance related to a capital loss carryover, the settlement of certain income
tax matters, and the lapse of a statute of limitations. The effective
income tax rate for income from continuing operations was 33.6% for the year
to
date 2006. The year to date 2006 rate was lower principally due to a net
reduction of income tax loss contingencies related to the resolution of certain
tax matters, partially offset by the write-down of deferred income tax assets
resulting from state tax reform.
NOTE
3 – PROPERTY AND EQUIPMENT, NET
In
the
second quarter of 2006, we incurred $1.5 million of asset impairment charges,
included in selling and administrative expenses on the consolidated statement
of
operations, for the write-down of long-lived assets of eight
stores. Assets are reviewed for impairment at the store level when
impairment indicators are present. We compare the net book value of
long-lived assets at stores where impairment indicators are present to estimated
future cash flows of each specific store in order to determine whether the
assets are recoverable. If the assets are not recoverable by the
estimated future cash flows, an impairment is recognized to write-down the
long-lived assets to fair value.
NOTE
4 – SHAREHOLDERS’ EQUITY
Earnings per
Share
There
were no adjustments required to be made to the weighted-average common shares
outstanding for purposes of computing basic and diluted earnings per share
and
there were no securities outstanding at November 3, 2007 or October 28, 2006,
which were excluded from the computation of earnings per share other than
antidilutive stock options and restricted stock. For the third
quarter of 2007 and the third quarter of 2006, 1.5 million and 1.1 million,
respectively, of stock options outstanding were antidilutive and excluded from
the computation of diluted earnings per share. For the year to date
2007 and the year to date 2006, 1.3 million and 2.7 million, respectively,
of
stock options outstanding were antidilutive and excluded from the computation
of
diluted earnings per share. Antidilutive stock options are generally
outstanding stock options where the exercise price is greater than the
weighted-average market price of our common shares for each
period. Antidilutive stock options are excluded from the computation
of earnings per share because they decrease the number of diluted shares
outstanding under the treasury share method.
Share
Repurchase Program
On
March
9, 2007, we announced that our Board of Directors authorized the repurchase
of
up to $600.0 million of our common shares commencing upon authorization and
continuing until exhausted (“2007 Repurchase Program”). We expected
the purchases to be made from time to time in the open market and/or in
privately negotiated transactions at our discretion, subject to market
conditions and other factors. Common shares acquired through the 2007
Repurchase Program will be held in our treasury and will be available to meet
obligations under our equity compensation plans and for general corporate
purposes.
As
part
of the 2007 Repurchase Program, we received 2.8 million of our outstanding
common shares during the first quarter of 2007, representing the minimum number
of shares purchased under a $100.0 million guaranteed share repurchase
transaction (“GSR”). Upon receipt, the 2.8 million shares were
removed from our basic and diluted weighted average common shares
outstanding. The GSR includes a forward contract indexed to the
average market price of our common shares that subjects the GSR to a future
share settlement based on the average share price between the contractually
specified price inception date of the GSR and the final settlement
date. The forward contract effectively places a collar around the
minimum and maximum number of our common shares that we will purchase under
the
GSR. We are not required to make any additional payments to the
counterparty under the GSR. We may receive up to 0.4 million
additional common shares from the counterparty in settlement of the
GSR. If the GSR had settled on November 3, 2007, we would have
received approximately 0.4 million additional common shares from the
counterparty based on the average market price of our common shares since the
beginning of the period specified by the GSR. We expect the GSR to
settle in the fourth quarter of 2007.
In
addition to the GSR, we repurchased approximately 6.1 million and 14.0 million,
respectively of our outstanding common shares in open market transactions at
an
aggregate cost of $153.2 million and $382.0 million, respectively during the
third quarter of 2007 and the year to date 2007. Our remaining
repurchase authorization under the 2007 Repurchase Program was
approximately $118.0 million as of November 3, 2007 (see Note 10 regarding
our
November 30, 2007 announcement of a new $150.0 million share repurchase
program).
The
shares acquired under the 2007 Repurchase Program, including shares acquired
under the GSR, were recorded as treasury shares, at cost.
NOTE
5 – STOCK PLANS
We
have
outstanding stock options and nonvested restricted stock awarded under equity
compensation plans approved by our shareholders. In accordance with
SFAS No. 123(R), Share-Based Payment, we recognized share-based
compensation expense of $2.6 million and $7.3 million in the third quarter
of
2007 and the year to date 2007, respectively, and $1.4 million and $2.9 million
in the third quarter of 2006 and the year to date 2006,
respectively. The expense in each period is less than what would have
been recognized due to the accelerated vesting of stock options prior to the
adoption of SFAS No. 123(R) (as discussed in more detail in Note 7 to the
consolidated financial statements in our 2006 Form 10-K).
The
weighted-average fair value of options granted and assumptions used in a
binomial model to estimate the fair value of stock options granted during each
of the respective periods were as follows:
|
|
Third
Quarter
|
|
|
Year
to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of options granted
|
|
$ |
12.08
|
|
|
$ |
7.99
|
|
|
$ |
11.59
|
|
|
$ |
5.52
|
|
Risk-free
interest rate
|
|
|
4.0 |
% |
|
|
4.7 |
% |
|
|
4.4 |
% |
|
|
4.6 |
% |
Expected
life (years)
|
|
|
4.9
|
|
|
|
4.8
|
|
|
|
4.4
|
|
|
|
4.6
|
|
Expected
volatility
|
|
|
43.8 |
% |
|
|
41.1 |
% |
|
|
42.6 |
% |
|
|
42.4 |
% |
Expected
annual forfeiture rate
|
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
A
summary
of the stock option activity for the year to date 2007 is as
follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic Value (000's)
|
|
Outstanding
stock options at February 3, 2007
|
|
|
6,644,990
|
|
|
$ |
15.78
|
|
|
|
5.3
|
|
|
$ |
73,439
|
|
Granted
|
|
|
1,057,500
|
|
|
|
28.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,318,325 |
) |
|
|
12.99
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(526,825 |
) |
|
|
26.91
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options at May 5, 2007
|
|
|
4,857,340
|
|
|
$ |
18.73
|
|
|
|
5.8
|
|
|
$ |
70,136
|
|
Granted
|
|
|
6,000
|
|
|
|
28.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(208,000 |
) |
|
|
14.01
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(243,900 |
) |
|
|
14.25
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options at August 4, 2007
|
|
|
4,411,440
|
|
|
$ |
19.21
|
|
|
|
5.6
|
|
|
$ |
34,109
|
|
Granted
|
|
|
92,500
|
|
|
|
28.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(207,480 |
) |
|
|
13.46
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(141,090 |
) |
|
|
33.67
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options at November 3, 2007
|
|
|
4,155,370
|
|
|
$ |
19.21
|
|
|
|
5.5
|
|
|
$ |
27,469
|
|
Vested
and expected to vest at November 3, 2007
|
|
|
3,975,476
|
|
|
$ |
19.17
|
|
|
|
5.5
|
|
|
$ |
26,433
|
|
Exercisable
at November 3, 2007
|
|
|
1,882,170
|
|
|
$ |
17.38
|
|
|
|
4.8
|
|
|
$ |
15,514
|
|
The
stock
options granted in 2007 vest in equal amounts on the first four anniversaries
of
the grant date and have a contractual term of seven years. The number
of stock options expected to vest was based on our annual forfeiture rate
assumption.
A
summary
of the restricted stock activity for the year to date 2007 is as
follows:
|
|
Number
of Shares
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Nonvested
restricted stock at February 3, 2007
|
|
|
408,671
|
|
|
$ |
12.37
|
|
Granted
|
|
|
319,100
|
|
|
|
28.73
|
|
Vested
|
|
|
(66,667 |
) |
|
|
11.25
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Nonvested
restricted stock at May 5, 2007
|
|
|
661,104
|
|
|
$ |
20.38
|
|
Granted
|
|
|
1,800
|
|
|
|
27.92
|
|
Vested
|
|
|
(283,500 |
) |
|
|
12.80
|
|
Forfeited
|
|
|
(2,700 |
) |
|
|
23.42
|
|
Nonvested
restricted stock at August 4, 2007
|
|
|
376,704
|
|
|
$ |
26.10
|
|
Granted
|
|
|
4,500
|
|
|
|
28.96
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2,700 |
) |
|
|
28.73
|
|
Nonvested
restricted stock at November 3, 2007
|
|
|
378,504
|
|
|
$ |
26.11
|
|
The
restricted stock granted in 2007 vests if certain financial performance
objectives are achieved. If we meet a threshold financial performance
objective and the grantee remains employed by us, the restricted stock will
vest
on the opening of our first trading window five years after the grant date
of
the award. If we meet a higher financial performance objective and
the grantee remains employed by us, the restricted stock will vest on the first
trading day after we file our Annual Report on Form 10-K with the SEC for the
fiscal year in which the higher objective is met. On the grant date, we
estimated a three-year period for vesting of these awards based on the assumed
achievement of the higher financial performance objective. In the
second quarter of 2007, we changed the estimated achievement date of the higher
financial performance objective from three years to two years, resulting in
$0.4 million of incremental expense in the third quarter of 2007 and $0.7
million of incremental expense in the year to date 2007.
During
the first quarter of 2007, the second and third common share price targets
were
met on the 100,000 shares of restricted stock awarded in 2005 to
Steven S. Fishman, our Chairman, Chief Executive Officer and
President, resulting in the vesting of the remaining 66,667 shares of restricted
stock and related expense by us of $0.7 million.
The
following activity occurred under our share-based compensation plans during
the
respective periods shown:
|
|
Third
Quarter
|
|
|
Year
to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intrinsic value of stock options exercised
|
|
$ |
3,423
|
|
|
$ |
9,042
|
|
|
$ |
45,931
|
|
|
$ |
15,967
|
|
Total
fair value of restricted stock vested
|
|
|
-
|
|
|
|
-
|
|
|
|
11,021
|
|
|
|
-
|
|
The
total
unearned compensation cost related to all share-based awards outstanding at
November 3, 2007 was approximately $21.7 million. This compensation
cost is expected to be recognized through October 2011 based on existing vesting
terms with the weighted-average remaining expense recognition period being
approximately 2.3 years from November 3, 2007.
NOTE
6 – EMPLOYEE BENEFIT PLANS
We
sponsor a qualified defined benefit pension plan and a nonqualified supplemental
defined benefit pension plan covering certain employees whose hire date was
before April 1, 1994.
The
following table identifies the components of net periodic pension
cost:
|
|
Third
Quarter
|
|
|
Year
to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost - benefits earned in the period
|
|
$ |
658
|
|
|
$ |
750
|
|
|
$ |
1,974
|
|
|
$ |
2,248
|
|
Interest
cost on projected benefit obligation
|
|
|
787
|
|
|
|
792
|
|
|
|
2,362
|
|
|
|
2,375
|
|
Expected
investment return on plan assets
|
|
|
(1,072 |
) |
|
|
(1,079 |
) |
|
|
(3,216 |
) |
|
|
(3,238 |
) |
Amortization
of actuarial loss
|
|
|
174
|
|
|
|
351
|
|
|
|
520
|
|
|
|
1,054
|
|
Amortization
of prior service cost
|
|
|
34
|
|
|
|
33
|
|
|
|
102
|
|
|
|
101
|
|
Amortization
of transition obligation
|
|
|
3
|
|
|
|
3
|
|
|
|
10
|
|
|
|
10
|
|
Settlement
loss
|
|
|
-
|
|
|
|
1,327
|
|
|
|
-
|
|
|
|
1,327
|
|
Net
periodic pension cost
|
|
$ |
584
|
|
|
$ |
2,177
|
|
|
$ |
1,752
|
|
|
$ |
3,877
|
|
Weighted-average
assumptions used to determine net periodic pension cost for 2007 and 2006
were:
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
5.9%
|
|
|
|
5.7%
|
|
Rate
of increase in compensation levels
|
|
|
3.5%
|
|
|
|
3.5%
|
|
Expected
long-term rate of return
|
|
|
8.5%
|
|
|
|
8.5%
|
|
Measurement
date for plan assets and benefit obligations
|
|
12/31/06
|
|
|
12/31/05
|
|
Our
funding for the defined benefit pension plans is not expected to be materially
different than the amounts disclosed in our 2006 Form 10-K.
NOTE
7 – CONTINGENCIES
In
November 2004, a civil putative collective action complaint was filed against
us in United States District Court for the Eastern District of Texas,
Texarkana Division, wherein it was alleged that we had violated the Fair
Labor Standards Act regulations by misclassifying as exempt employees our
furniture department managers, sales managers, and assistant managers (“Texas
matter”). Subsequent to its filing, the plaintiffs in the Texas matter amended
the complaint to limit its scope to furniture department managers. The
plaintiffs in the Texas matter seek to recover, on behalf of themselves and
all
other individuals who are similarly situated, alleged unpaid overtime
compensation, as well as liquidated damages, attorneys’ fees and
costs. On August 8, 2005, the District Court in Texas issued an order
conditionally certifying a class of all current and former employees who worked
for us as a furniture department manager at any time between November 2, 2001
and October 1, 2003. As a result of that order, notice was sent to
approximately 1,300 individuals who had the right to opt-in to the Texas matter.
In the third quarter of 2006, we reached a tentative settlement with the
plaintiffs concerning the Texas matter. We recorded, in the third quarter
of 2006, a pretax charge of $3.2 million included in selling and administrative
expenses for the estimated settlement liability of the Texas
matter. On January 17, 2007, the court approved the settlement, and
in 2007, we paid the settlement.
In
October 2005, a class action complaint was served upon us for adjudication
in
the Superior Court of the State of California, County of Ventura, wherein it
was
alleged that we had violated certain California wage and hour laws (“California
matter”). The plaintiff seeks to recover, on her own behalf and on behalf of all
other individuals who are similarly situated, alleged unpaid wages and rest
and
meal period compensation, as well as penalties, injunctive and other equitable
relief, reasonable attorneys’ fees and costs. In the third quarter of 2006, we
reached a tentative settlement with the plaintiff concerning the California
matter. On November 6, 2006, the court issued an order granting preliminary
approval of the tentative settlement. On April 30, 2007, the court entered
the
final order approving the class action settlement and judgment of dismissal
with
prejudice. Two class members whose objections to the settlement were
overruled by the court have appealed the final order to the California Court
of
Appeal, challenging the settlement. The same two objectors also filed
a separate putative class action in federal court in the Northern District
of
California alleging the same class claims that were tentatively settled through
the California matter. The federal court stayed the federal action
pending resolution of the appeal before the California Court of
Appeal. The timing and outcome of the appeal are uncertain; however,
we intend to vigorously oppose the appeal of the court-approved settlement.
We
recorded, in the third quarter of 2006, a pretax charge of $6.5 million included
in selling and administrative expenses for the agreed-upon settlement amount
of
the California matter. We believe that we had adequate liability reserves for
the California matter at November 3, 2007; however, the ultimate resolution
of
the pending appeal could have a material adverse effect on our financial
condition, results of operations, and liquidity.
In
November 2004, a civil putative collective action complaint was filed against
us
in the United States District Court for the Eastern District of Louisiana,
wherein it was alleged that we violated the Fair Labor Standards Act by
misclassifying assistant store managers as exempt employees (“Louisiana
matter”). The plaintiffs seek to recover, on behalf of themselves and all other
individuals who are similarly situated, alleged unpaid overtime compensation,
as
well as liquidated damages, attorneys’ fees and costs. On July 5, 2005, the
District Court in Louisiana issued an order conditionally certifying a class
of
all current and former assistant store managers who have worked for us since
November 23, 2001. As a result of that order, notice of the lawsuit was sent
to
approximately 5,500 individuals who had the right to opt-in to the Louisiana
matter. As of November 3, 2007, approximately 1,100 individuals had joined
the
Louisiana matter. We filed a motion to decertify the class and the motion was
denied on August 24, 2007. The Louisiana matter is scheduled to go to trial
on May 8, 2008. Pending completion of discovery on the
plaintiffs’ claims, we cannot make a determination as to the probability of a
loss contingency resulting from the Louisiana matter or the estimated range
of
possible loss, if any. We intend to vigorously defend ourselves against the
allegations levied in the Louisiana matter; however, the ultimate resolution
of
this matter could have a material adverse effect on our financial condition,
results of operations, and liquidity.
In
September 2006, a class action complaint was filed against us in the Superior
Court of the State of California, County of Los Angeles, wherein it was alleged
that we had violated certain California wage and hour laws by misclassifying
California store managers as exempt employees. The plaintiff seeks to recover,
on his own behalf and on behalf of all other individuals who are similarly
situated, damages for alleged unpaid overtime, unpaid minimum wages, wages
not
paid upon termination, improper wage statements, missed rest breaks, missed
meal
periods, reimbursement of expenses, loss of unused vacation time, and attorneys’
fees and costs. Pending discovery on the plaintiffs’ claims, we cannot make a
determination as to the probability of a loss contingency resulting from this
lawsuit or the estimated range of possible loss, if any. We intend to vigorously
defend ourselves against the allegations levied in this lawsuit; however, the
ultimate resolution of this matter could have a material adverse effect on
our
financial condition, results of operations, and liquidity.
In
May
2007, two class action complaints were filed against us, one in the Superior
Court of the State of California, County of Orange (“Stary matter”), and one in
the Superior Court of the State of California, County of San Diego (“Christopher
matter”), wherein it was alleged that we had violated California law by
requesting certain customer information in connection with the return of
merchandise for which the customer sought to receive a refund to a credit
card. The plaintiffs seek to recover, on their own behalf and on
behalf of all other individuals who are similarly situated, statutory penalties,
costs and attorneys' fees and seek injunctive relief. We believe that
substantially all of the purported class members of the Christopher matter
are
within the purported class of the Stary matter. The Stary matter has been
transferred to the Superior Court of the State of California, County of San
Diego, where it will be coordinated with the Christopher matter before the
same
judge. Pending discovery on the plaintiffs' claims, we cannot make a
determination as to the probability of a loss contingency resulting from these
lawsuits or the estimated range of possible loss, if any. We intend
to vigorously defend ourselves against the allegations levied in these lawsuits;
however, the ultimate resolution of these matters could have a material adverse
effect on our financial condition, results of operations, and
liquidity.
We
are
involved in other legal actions and claims, including various additional
employment-related matters, arising in the ordinary course of business. We
currently believe that such actions and claims, both individually and in the
aggregate, will be resolved without material adverse effect on our financial
condition, results of operations, or liquidity. However, litigation involves
an
element of uncertainty. Future developments could cause these actions or claims
to have a material adverse effect on our financial condition, results of
operations, and liquidity.
NOTE
8 – DISCONTINUED OPERATIONS
Closed
Stores
During
2005, we closed 130 stores that met the criteria for discontinued operations
reporting. The pretax costs of $0.2 million and $0.8 million recorded
in the third quarter of 2007 and the year to date 2007, respectively, and $1.1
million and $3.6 million recorded in the third quarter of 2006 and the year
to
date 2006, respectively, principally included continuing costs associated with
those closed stores having remaining lease terms.
At
the
end of 2006, we had approximately $5.9 million accrued for the remaining
obligations for the discontinued operations lease termination
costs. During the year to date 2007, we paid, net of sublease
receipts of $0.3 million, approximately $2.9 million of the liability for these
lease termination costs and recorded $0.1 million of accretion
expense.
KB
Toys Matters
In
the
second quarter of 2007, we recorded $2.0 million, pretax, as income from
discontinued operations to reflect favorable settlements of KB Toys lease
obligations. We sold the KB Toys business to KB Acquisition
Corporation in December 2000, but we have continuing lease indemnification
and
guarantee obligations with respect to approximately 108 KB Toys’
stores. See Note 11 to the consolidated financial statements and Risk
Factors in our 2006 Form 10-K for further discussion of KB Toys
matters.
In
the
year to date 2006, we recorded $0.7 million, pretax, as income from discontinued
operations primarily to reflect the reduction of insurance reserves specifically
identifiable with respect to the KB Toys business.
NOTE
9 – BUSINESS SEGMENT DATA
We
manage
our business based on one segment, broadline closeout
retailing. During the first quarter of 2007, in connection with the
completion of the internal re-alignment of certain merchandising departments
and
classes between our divisional merchandising managers, we determined that the
following six merchandise categories most directly match our internal management
and reporting of merchandise net sales results: Consumables, Home,
Furniture, Hardlines, Seasonal, and Other. Effective for the first
quarter of 2007, we are communicating these six categories externally to report
net sales information by each merchandise group in accordance with the
requirements of SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. Prior period amounts presented were
reclassified to conform to the current year presentation.
The
following is net sales data by category:
|
|
Third
Quarter
|
|
|
Year
to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
334,712
|
|
|
$ |
324,330
|
|
|
$ |
971,940
|
|
|
$ |
940,726
|
|
Home
|
|
|
190,433
|
|
|
|
207,776
|
|
|
|
558,021
|
|
|
|
579,293
|
|
Furniture
|
|
|
160,169
|
|
|
|
150,292
|
|
|
|
502,435
|
|
|
|
472,342
|
|
Hardlines
|
|
|
136,838
|
|
|
|
141,286
|
|
|
|
436,341
|
|
|
|
431,268
|
|
Seasonal
|
|
|
83,674
|
|
|
|
77,504
|
|
|
|
402,579
|
|
|
|
384,560
|
|
Other
|
|
|
124,812
|
|
|
|
148,349
|
|
|
|
372,612
|
|
|
|
389,505
|
|
Net
sales
|
|
$ |
1,030,638
|
|
|
$ |
1,049,537
|
|
|
$ |
3,243,928
|
|
|
$ |
3,197,694
|
|
The
Consumables category includes the food, health and beauty, plastics, paper,
and
pet departments. The Home category includes the domestics,
stationery, and home decorative departments. The Furniture category includes
the
upholstery, mattresses, ready-to-assemble, and case goods
departments. Case goods consist of bedroom, dining room, and living
room furniture. The Hardlines category includes the electronics,
appliances, tools, and home maintenance departments. The Seasonal
category includes the lawn & garden, Christmas, fall, and summer
departments. The Other category includes the toy, jewelry, infant
accessories, and apparel departments.
NOTE
10 – SUBSEQUENT EVENT
On
November 30, 2007, we announced that our Board of Directors authorized a new
repurchase program ("November 2007 Repurchase Program") providing for the
repurchase of up to $150.0 million of our common shares commencing with the
completion of the $600.0 million repurchase program announced on March 9, 2007
and continuing until exhausted. On December 3, 2007, we exhausted the
$600.0 million authorized to repurchase our common shares under the program
announced in March 2007. Under the November 2007 Repurchase Program,
we expect the purchases to be made from time to time in the open market and/or
in privately negotiated transactions at our discretion, subject to market
conditions and other factors. Common shares acquired through the repurchase
programs will be available to meet obligations under equity compensation plans
and for general corporate purposes.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The
Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor
for forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking
and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the statements. We wish to take advantage of the “safe harbor”
provisions of the Act.
Certain
statements in this report are forward-looking statements within the meaning
of
the Act, and such statements are intended to qualify for the protection of
the
safe harbor provided by the Act. The words "anticipate," "estimate," "expect,"
"objective," "goal," "project," "intend," "plan," "believe," "will," "target,"
"forecast," “guidance,” “outlook,” and similar expressions generally identify
forward-looking statements. Similarly, descriptions of our objectives,
strategies, plans, goals or targets are also forward-looking statements.
Forward-looking statements relate to the expectations of management as to future
occurrences and trends, including statements expressing optimism or pessimism
about future operating results or events and projected sales, earnings, capital
expenditures and business strategy. Forward-looking statements are based upon
a
number of assumptions concerning future conditions that may ultimately prove
to
be inaccurate. Forward-looking statements are and will be based upon
management's then-current views and assumptions regarding future events and
operating performance, and are applicable only as of the dates of such
statements. Although we believe the expectations expressed in forward-looking
statements are based on reasonable assumptions within the bounds of our
knowledge, forward-looking statements, by their nature, involve risks,
uncertainties and other factors, any one or a combination of which could
materially affect our business, financial condition, results of operations
or
liquidity.
Forward-looking
statements that we make herein and in other reports and releases are not
guarantees of future performance and actual results may differ materially from
those discussed in such forward-looking statements as a result of various
factors, including, but not limited to, the cost of goods, our inability to
successfully execute strategic initiatives, competitive pressures, economic
pressures on our customers and us, the availability of brand name closeout
merchandise, trade restrictions, freight costs, the risks discussed in the
Risk
Factors section of our most recent Annual Report on Form 10-K, and other factors
discussed from time to time in our other filings with the SEC, including our
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. This report
should be read in conjunction with such filings, and you should consider all
of
these risks, uncertainties and other factors carefully in evaluating
forward-looking statements.
Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date thereof. We undertake no obligation to publicly update
forward-looking statements whether as a result of new information, future events
or otherwise. Readers are advised, however, to consult any further disclosures
we make on related subjects in our public announcements and SEC
filings.
OVERVIEW
The
discussion and analysis presented below should be read in conjunction with
the
accompanying consolidated financial statements and related notes. The
terms defined in the notes have the same meanings in this item and the balance
of this report.
The
following are the results from the third quarter of 2007 that we believe are
key
indicators of our operating performance when compared to our operating
performance from the third quarter of 2006. Even though sales were
less than anticipated during the third quarter of 2007, we achieved record
third
quarter net income and earnings per share by executing our operating strategies
and reducing costs.
|
·
|
Comparable
store sales for stores open at least two years at the beginning of
2007
decreased 0.5%.
|
|
·
|
Gross
margin dollars decreased $3.5 million principally due to lower net
sales
of $18.9 million partially offset by the increase in gross margin
rate of 40 basis points to 40.0% of sales versus 39.6% of
sales.
|
|
·
|
Selling
and administrative expenses as a percent of sales decreased 130 basis
points to 35.7% of sales versus 37.0% of sales. In the third
quarter of 2006, we reached tentative settlements of two
employment-related civil actions brought against us and we recorded
pretax
charges of $9.7 million (90 basis points) included in selling and
administrative expenses for the estimated settlement liability for
these
matters.
|
|
·
|
Depreciation
expense as a percent of sales decreased 30 basis points to 2.1% of
sales
versus 2.4% of sales.
|
|
·
|
Diluted
earnings per share from continuing operations improved to $0.14 per
share
compared to $0.02 per share. The litigation charges recorded in
the third quarter of 2006 lowered diluted earnings per share approximately
$0.05 per share in that quarter.
|
|
·
|
Net
cash used in operating activities was $52.6 million in the third
quarter
of 2007 compared to $40.3 million in the third quarter of
2006. The seasonal increase in inventories, partially offset by
higher accounts payable, drove the cash used in operating activities
in
the third quarter of 2007.
|
|
·
|
We
acquired 6.1 million of our common shares under the 2007 Repurchase
Program during the third quarter of
2007.
|
See
the
discussion and analysis below for additional details of our operating
results.
STORES
The
following table presents stores opened and closed during the year to date 2007
and the year to date 2006:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Stores
open at the beginning of the fiscal year
|
|
|
1,375
|
|
|
|
1,401
|
|
Stores
opened during the period
|
|
|
7
|
|
|
|
10
|
|
Stores
closed during the period
|
|
|
(14 |
) |
|
|
(8 |
) |
Stores
open at the end of the period
|
|
|
1,368
|
|
|
|
1,403
|
|
RESULTS
OF OPERATIONS
The
following table compares components of our consolidated statements of operations
as a percentage of net sales at the end of each period:
|
|
Third
Quarter
|
|
|
Year
to Date
|
|
|
|
2007
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
% |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
60.0
|
|
|
|
|
60.4
|
|
|
|
60.5
|
|
|
|
60.4
|
|
Gross
margin
|
|
|
40.0
|
|
|
|
|
39.6
|
|
|
|
39.5
|
|
|
|
39.6
|
|
Selling
and administrative expenses
|
|
|
35.7
|
|
|
|
|
37.0
|
|
|
|
34.4
|
|
|
|
36.3
|
|
Depreciation
expense
|
|
|
2.1
|
|
|
|
|
2.4
|
|
|
|
2.0
|
|
|
|
2.3
|
|
Operating
profit
|
|
|
2.2
|
|
|
|
|
0.2
|
|
|
|
3.0
|
|
|
|
1.0
|
|
Interest
expense
|
|
|
0.0
|
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Interest
income
|
|
|
0.1
|
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Income
from continuing operations before income taxes
|
|
|
2.2
|
|
|
|
|
0.2
|
|
|
|
3.2
|
|
|
|
1.0
|
|
Income
tax expense
|
|
|
0.8
|
|
|
|
|
0.0
|
|
|
|
1.2
|
|
|
|
0.3
|
|
Income
from continuing operations
|
|
|
1.4
|
|
|
|
|
0.2
|
|
|
|
2.0
|
|
|
|
0.7
|
|
Discontinued
operations
|
|
|
0.0
|
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Net
income
|
|
|
1.4
|
% |
|
|
|
0.2 |
% |
|
|
2.0 |
% |
|
|
0.6 |
% |
THIRD
QUARTER OF 2007 AND THIRD QUARTER OF 2006
Net
Sales
Net
sales
decreased 1.8% to $1,030.6 million for the third quarter of 2007, compared
to
$1,049.5 million for the third quarter of 2006. Fewer open
stores drove the decrease in net sales along with our comparable store sales
decrease of 0.5% for the third quarter of 2007. Comparable store sales were
calculated using comparable calendar weeks in both 2007 and 2006. The
calendar periods used to calculate comparable store sales did not align with
the
fiscal periods in 2007 and 2006 because of the 53rd week in
fiscal
2006. Accordingly, changes in comparable store sales may not be
consistent with changes in net sales reported for the fiscal
period. From a merchandising perspective, comparable store sales
performed better in the Furniture and Consumables categories. In
contrast, comparable store sales of Home, the toys department included in Other,
and fall departments included in Seasonal underperformed.
The
following table details net sales by product category with the percentage of
each category to total net sales and the net sales change in dollars and
percentage from the third quarter of 2007 to the third quarter of 2006 (see
Note
9 to the accompanying consolidated financial statements for discussion regarding
the change from four categories of merchandise to six merchandise categories
effective as of the first quarter of 2007):
|
|
Third
Quarter
|
|
|
2007
|
|
|
|
2006
|
|
|
Change
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
334,712
|
|
|
|
32.5
|
%
|
|
|
$ |
324,330
|
|
|
|
30.9
|
%
|
|
$ |
10,382
|
|
|
|
3.2 |
% |
Home
|
|
|
190,433
|
|
|
|
18.5
|
|
|
|
|
207,776
|
|
|
|
19.8
|
|
|
|
(17,343 |
) |
|
|
(8.3 |
) |
Furniture
|
|
|
160,169
|
|
|
|
15.5
|
|
|
|
|
150,292
|
|
|
|
14.3
|
|
|
|
9,877
|
|
|
|
6.6
|
|
Hardlines
|
|
|
136,838
|
|
|
|
13.3
|
|
|
|
|
141,286
|
|
|
|
13.5
|
|
|
|
(4,448 |
) |
|
|
(3.1 |
) |
Seasonal
|
|
|
83,674
|
|
|
|
8.1
|
|
|
|
|
77,504
|
|
|
|
7.4
|
|
|
|
6,170
|
|
|
|
8.0
|
|
Other
|
|
|
124,812
|
|
|
|
12.1
|
|
|
|
|
148,349
|
|
|
|
14.1
|
|
|
|
(23,537 |
) |
|
|
(15.9 |
) |
Net
sales
|
|
$ |
1,030,638
|
|
|
|
100.0
|
%
|
|
|
$ |
1,049,537
|
|
|
|
100.0
|
%
|
|
$ |
(18,899 |
) |
|
|
(1.8 |
)% |
Gross
Margin
Gross
margin decreased to $411.8 million for the third quarter of 2007, compared
to
$415.3 million for the third quarter of 2006, a decrease of $3.5 million or
0.8%. The decrease in gross margin was principally due to decreased net sales
of
$18.9 million partially offset by a higher gross margin percentage in the third
quarter of 2007. Gross margin as a percentage of net sales
increased to 40.0% in the third quarter of 2007, compared to 39.6% in the
third quarter of 2006. Higher initial markup and savings associated with
in-bound freight initiatives drove the gross margin rate increase.
Selling
and Administrative Expenses
Selling
and administrative expenses decreased to $367.8 million for the third quarter
of
2007, compared to $388.0 million for the third quarter of 2006, a decrease
of
$20.2 million or 5.2%. Included in selling and administrative expenses in the
third quarter of 2006 was $9.7 million of charges to record the estimated
settlement liabilities for two employment-related civil actions (see Note 7
to
the accompanying consolidated financial statements for additional information
regarding these lawsuits). Selling and administrative expenses as a
percentage of net sales were 35.7% for the third quarter of 2007 compared to
37.0% for the third quarter of 2006. This improvement was primarily
due to the $9.7 million litigation charge discussed above and due to lower
selling and administrative expenses for insurance-related costs, distribution
and transportation costs, and store payroll. Insurance-related costs
were lower primarily due to a reduction in health and welfare plan expenses
driven by a change in the plan’s service provider effective February 1,
2007. Additionally, we have fewer plan participants in the current year
primarily due to fewer open stores. Distribution and
outbound transportation costs, which were included in selling and
administrative expenses, decreased to $47.7 million for the third quarter of
2007 compared to $52.5 million for the third quarter of 2006. As a percentage
of
net sales, distribution and outbound transportation costs decreased by 40
basis points to 4.6% of net sales in the third quarter of 2007 compared to
5.0%
of net sales for the third quarter of 2006. Distribution and outbound
transportation cost savings have been achieved through certain management
initiatives including but not limited to improvements in furniture distribution,
more efficient scheduling of labor used in the distribution centers, and
transportation initiatives aimed at optimizing the use of our transportation
fleet and the increased usage of third party one-way carriers. The
higher use of third party one-way carriers, which began late in the second
quarter of 2007, has increased our cost per mile while decreasing the overall
transportation cost as a result of fewer miles traveled. Store
payroll continues to benefit from merchandising strategies such as “raise the
ring” and acquiring more floor-ready merchandise that resulted in a reduction in
payroll hours required to process fewer cartons. See the
Merchandising section of Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our 2006 Form 10-K for additional
information regarding our “raise the ring” strategy. Higher
advertising expense and stock-based compensation expense partially offset the
expense decreases. Advertising expense increased from $18.1 million in the
third
quarter of 2006 to $19.7 million in the third quarter of 2007 primarily due
to
an increase in television advertising spend which reflects the impact of the
retail calendar shift caused by the 53rd week in
2006. Stock-based compensation expense increased from $1.4 million in
the third quarter of 2006 to $2.6 million in the third quarter of 2007 due
to
the increase in the weighted-average fair value of stock options granted in
2007
and in part due to the accelerated vesting of stock options prior to the
adoption of SFAS No. 123(R) (as discussed in more detail in Note 7 to the
consolidated financial statements in our 2006 Form 10-K).
Depreciation
Expense
Depreciation
expense for the third quarter of 2007 was $21.3 million, compared to $25.0
million for the third quarter of 2006. The $3.7 million decrease was primarily
due to the decline in capital expenditures over the last 24 months compared
to
earlier fiscal years. The reduction in capital expenditures
principally relates to fewer store openings.
Interest
and Investment Income
Interest
and investment income was $0.6 million for the third quarter of 2007, compared
to $0.1 million for the third quarter of 2006. The increase in
interest and investment income, lapae of or statute of limitations was
principally due to higher levels of funds available for investment during the
third quarter of 2007 compared to the third quarter of 2006.
Income
Taxes
The
effective income tax rate for the third quarter of 2007 for income from
continuing operations was 37.7%, and benefited from the lapse of a statute
of limitations. The income tax rate for income from continuing
operations of 17.0% for the third quarter of 2006 was impacted primarily by
a
net reduction of income tax loss contingencies related to the resolution of
certain tax matters and their relative impact on pretax income.
YEAR
TO DATE 2007 AND YEAR TO DATE 2006
Net
Sales
Net
sales
increased 1.4% to $3,243.9 million for the year to date 2007, compared to
$3,197.7 million for the year to date 2006. The increase in net sales
was driven by our comparable store sales increase of 3.2% for the year to date
2007, partially offset by fewer open stores. Comparable store sales were
calculated using comparable calendar weeks in both 2007 and 2006. The
calendar periods used to calculate comparable store sales did not align with
the
fiscal periods in 2007 and 2006 because of the 53rd week in
fiscal
2006. Accordingly, changes in comparable store sales may not be
consistent with changes in net sales reported for the fiscal
period. Comparable store sales in the year to date 2007 were driven
by an increase in the value of the average basket as our “raise the ring”
strategy continues to deliver positive results. From a merchandising
perspective, comparable store sales performed better in the Furniture, Seasonal,
Consumables, and Hardlines categories. In contrast, comparable store
sales of the Home category and the toys department, included in the Other
category, underperformed.
The
following table details net sales by product category with the percentage of
each category to total net sales and the net sales change in dollars and
percentage from the year to date 2007 to the year to date 2006 (See Note 9
to
the accompanying consolidated financial statements for discussion regarding
the
change from four categories of merchandise to six merchandise categories
effective as of the first quarter of 2007):
|
|
Year
to Date
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$ |
971,940
|
|
|
|
30.0
|
%
|
|
$ |
940,726
|
|
|
|
29.4 |
% |
|
$ |
31,214
|
|
|
|
3.3 |
% |
Home
|
|
|
558,021
|
|
|
|
17.2
|
|
|
|
579,293
|
|
|
|
18.1
|
|
|
|
(21,272 |
) |
|
|
(3.7 |
) |
Furniture
|
|
|
502,435
|
|
|
|
15.5
|
|
|
|
472,342
|
|
|
|
14.8
|
|
|
|
30,093
|
|
|
|
6.4
|
|
Hardlines
|
|
|
436,341
|
|
|
|
13.4
|
|
|
|
431,268
|
|
|
|
13.5
|
|
|
|
5,073
|
|
|
|
1.2
|
|
Seasonal
|
|
|
402,579
|
|
|
|
12.4
|
|
|
|
384,560
|
|
|
|
12.0
|
|
|
|
18,019
|
|
|
|
4.7
|
|
Other
|
|
|
372,612
|
|
|
|
11.5
|
|
|
|
389,505
|
|
|
|
12.2
|
|
|
|
(16,893 |
) |
|
|
(4.3 |
) |
Net
sales
|
|
$ |
3,243,928
|
|
|
|
100.0
|
%
|
|
$ |
3,197,694
|
|
|
|
100.0 |
% |
|
$ |
46,234
|
|
|
|
1.4 |
% |
Gross
Margin
Gross
margin increased to $1,279.8 million for the year to date 2007, compared to
$1,266.0 million for the year to date 2006, an increase of $13.8 million or
1.1%. The increase in gross margin was principally due to increased net sales
of
$46.2 million. Gross margin as a percentage of net sales decreased
slightly to 39.5% in the year to date 2007 compared to 39.6% in the year to
date
2006.
Selling
and Administrative Expenses
Selling
and administrative expenses decreased to $1,116.3 million for the year to date
2007, compared to $1,160.5 million for the year to date 2006, a decrease of
$44.2 million or 3.8%. Included in selling and administrative
expenses in the year to date 2007 was approximately $4.5 million of insurance
proceeds we received as recovery for damages related to hurricanes occurring
in
2005. Included in selling and administrative expenses in the year to
date 2006 was $9.7 million of charges to record the estimated settlement
liabilities for two employment-related civil actions (see Note 7 to the
accompanying financial statements for additional information regarding these
lawsuits). Selling and administrative expenses as a percentage of net
sales were 34.4% for the year to date 2007 compared to 36.3% for the year to
date 2006. This decrease was due to the prior year litigation
charges, the receipt of insurance proceeds in the current year, and decreased
insurance-related costs, distribution and transportation costs, and store
payroll. Insurance-related costs were lower primarily due to a
reduction in health and welfare plan expenses driven by a change in the plan’s
service provider effective February 1, 2007. Additionally, we have
fewer plan participants in the current year primarily due to fewer open
stores. Distribution and outbound transportation costs, which were
included in selling and administrative expenses, decreased to $149.1 million
for
the year to date 2007, compared to $161.8 million for the year to date 2006.
As
a percentage of net sales, distribution and outbound transportation costs
decreased by 50 basis points to 4.6% of net sales for the year to date 2007
compared to 5.1% of net sales for the year to date 2006. Distribution and
outbound transportation cost savings have been achieved through certain
management initiatives including but not limited to improvements in furniture
distribution, more efficient scheduling of labor used in the distribution
centers, and transportation initiatives aimed at optimizing the use of our
transportation fleet and increased usage of third party one-way
carriers. The higher use of third party one-way carriers, which began
late in the second quarter of 2007, has increased our cost per mile while
decreasing the overall transportation cost as a result of fewer miles
traveled. Store payroll continues to benefit from merchandising strategies
such as “raise the ring” and acquiring more floor-ready merchandise that
resulted in a reduction in payroll hours required to process fewer cartons
while
generating additional sales dollars. Higher advertising expense and
stock-based compensation expense partially offset the expense decreases.
Advertising expense increased from $64.7 million for the year to date 2006
to
$66.0 million for the year to date 2007, primarily due to an increase in
television advertising spend (after advertising space) which reflects the impact
of the retail calender shift caused by the 53rd week in
2006. Stock-based compensation expense increased from $2.9 million
for the year to date 2006 to $7.3 million for the year to date 2007 due to
the
increase in the weighted-average fair value of stock options granted in 2007
and in part due to the accelerated vesting of stock options prior to the
adoption of SFAS No. 123(R) (as discussed in more detail in Note 7 to the
consolidated financial statements in our 2006 Form 10-K).
Depreciation
Expense
Depreciation
expense for the year to date 2007 was $64.9 million, compared to $74.6 million
for the year to date 2006. The $9.7 million decrease was primarily due to the
relatively lower level of capital expenditures over the last 24 months compared
to earlier fiscal years. The reduction in capital expenditures
principally relates to fewer store openings.
Interest
and Investment Income
Interest
and investment income was $5.2 million for the year to date 2007, compared
to
$1.2 million for the year to date 2006. The increase in interest and
investment income was principally due to higher levels of funds available for
investment in the year to date 2007 compared to the year to date
2006.
Income
Taxes
The
effective income tax rate for the year to date 2007 for income from continuing
operations was 36.6%, and benefited from the reduction in a valuation allowance
related to a capital loss carryover, the settlement of certain income tax
matters, and the lapse of a statute of limitations. The income tax
rate for income from continuing operations of 33.6% during the year to date
2006
was caused principally by a net reduction of income tax loss contingencies
related to the resolution of certain tax matters, partially offset by the
write-down of deferred income tax assets resulting from state tax
reform.
Discontinued
Operations
During
2005, we closed 130 stores that met the criteria for discontinued operations
reporting. The pretax costs of $0.8 million and $3.6 million recorded
in the year to date 2007 and the year to date 2006, respectively, principally
include continuing costs associated with those closed stores having remaining
lease terms. These costs have declined in 2007 compared to 2006 due to the
decline in the number of closed stores with remaining leases.
In
the
second quarter of 2007, we recorded $2.0 million, pretax, as income from
discontinued operations to reflect favorable settlements of KB Toys lease
obligations. In the year to date 2006, we recorded $0.7 million,
pretax, as income from discontinued operations primarily to reflect the
reduction of insurance reserves specifically identifiable with respect to the
KB
Toys business.
Off-Balance
Sheet Arrangements
We
sold the KB Toys business to KB Acquisition
Corporation in December 2000, but we have continuing indemnification and
guarantee obligations with respect to approximately 108 KB Toys’
stores. See Note 11 to the consolidated financial statements and Risk
Factors in our 2006 Form 10-K for further discussion of KB Toys
matters.
CAPITAL
RESOURCES AND LIQUIDITY
The
primary source of our liquidity is cash flows from operations and, as necessary,
borrowings under our $500.0 million unsecured credit facility entered into
in
2004 (“2004 Credit Agreement”). We use the 2004 Credit Agreement
primarily to manage ongoing and seasonal working capital. At November
3, 2007, the total borrowings outstanding under the 2004 Credit Agreement were
$138.9 million. The borrowings available under the 2004 Credit
Agreement, after taking into account the reduction in availability resulting
from outstanding letters of credit totaling $57.8 million, were $303.3 million
at November 3, 2007. Total indebtedness under the 2004 Credit
Agreement reached approximately $275.0 million in November 2007. We
expect that total indebtedness under the 2004 Credit Agreement will decline
through the remainder of 2007; however, if the $150.0 million repurchase program
announced in November 2007 is completed, total indebtedness is not expected
to
exceed $325.0 million through early March 2008. The amount of
borrowings under the 2004 Credit Agreement may fluctuate materially depending
on
various factors including our seasonal need to acquire merchandise inventory
prior to peak selling seasons, the timing and amount of sales to customers,
and
potential activity under our share repurchase programs. For a
detailed description of the 2004 Credit Agreement, see Note 3 to the
consolidated financial statements in our 2006 Form 10-K.
Net
cash
provided by operating activities was $45.0 million for year to date 2007,
compared to net cash provided by operating activities of $72.8 million for
the
year to date 2006. The year to date 2007 results were principally
driven by net income of $66.4 million and depreciation and amortization expense
of $60.7 million. These increases in cash were partially offset by an
increase in inventories in excess of the increase in accounts payable by $38.6
million, a decrease in other current liabilities of $11.4 million, and current
income tax payments in excess of the tax provision of $21.1
million. The increase in inventories was due to the seasonality of
our business that requires higher inventory levels prior to the peak Christmas
selling season. The increase in accounts payable was driven by
the increased inventory receipts, in part due to management and merchant efforts
to improve terms with our vendors, and the reclassification of $18.4 million
of
outstanding checks to accounts payable from cash and cash
equivalents. At November 3, 2007, we did not have sufficient funds
deposited in our disbursement bank to offset the outstanding checks, and as
a
result, we reported these unfunded checks in accounts payable. As a
result of higher taxable income and the timing of required tax payments, we
paid
income taxes of $45.8 million, net of refunds, in the year to date 2007 compared
to income tax payments, net of refunds of $8.1 million in the year to date
2006. The decrease in other current liabilities principally resulted
from bonuses paid in the year to date 2007. Bonus payments were
higher in the year to date 2007 principally because we paid a general office
bonus based on 2006 performance, and we did not pay a general office bonus
during the year to date 2006 based on 2005 performance.
The
year
to date 2006 cash provided by operating activities resulted primarily from
net
income of $19.7 million and depreciation and amortization expense of $70.4
million. These increases in cash were partially offset by an increase
in inventories in excess of the increase in accounts payable by $25.0 million
and a net use of cash for income taxes of $5.1 million.
Net
cash
used in investing activities, which was principally comprised of capital
expenditures, was $38.1 million for the year to date 2007, compared to $25.3
million for the year to date 2006. We are in the process of
implementing a new point of sale register system in all of our
stores. The implementation of this new system will affect 2007 and
2008 capital expenditures. Additionally, in 2007, we have completed a
store retrofit with respect to 70 stores that were predominantly high volume
and
small square footage locations principally in California. The purpose
of the retrofit was to get more merchandise out on the selling floor,
better allocate square footage to key merchandise categories, and whenever
possible create enough selling space to house a full-sized furniture
department.
Net
cash
used in financing activities was $246.8 million for the year to date 2007,
compared to $41.6 million for the year to date 2006. In the year to
date 2007, we disbursed $443.3 million for the acquisition of our common shares,
which was partially offset by $138.9 million of net borrowings under the 2004
Credit Agreement, $35.8 million of proceeds from the exercise of stock options,
and $19.8 million for the excess tax benefit from share-based
awards. In the year to date 2006, we purchased $134.2 million of our
common shares, which was partially offset by net proceeds from debt of $30.6
million, proceeds from the exercise of stock options of $40.7 million, $6.2
million for the excess tax benefit from share-based awards, and $13.3 million
in
proceeds from the sale of a store we owned.
As
of
November 3, 2007, we had invested $100.0 million in the GSR and acquired an
additional $382.0 million of our common shares in open market transactions
in
accordance with the 2007 Repurchase Program. As of November 3, 2007,
$41.0 million of the open market transactions had not yet
settled. Since November 3, 2007, we purchased the remaining
authorized $118.0 million of our common shares under the 2007 Repurchase
Program. See Note 4 to the accompanying consolidated financial statements for
additional information regarding the GSR.
On
November 30, 2007, we announced the November 2007 Repurchase Program which
commences upon completion of the $600 million program announced in March
2007. Under the November 2007 Repurchase Program, we expect the
purchases to be made from time to time in the open market and/or in privately
negotiated transactions at our discretion, subject to market conditions and
other factors.
We
continue to believe that we have, or, if necessary, have the ability to obtain,
adequate resources to fund ongoing and seasonal working capital requirements,
future capital expenditures, development of new projects, and currently maturing
obligations. Additionally, management is not aware of any current trends,
events, demands, commitments, or uncertainties which reasonably can be expected
to have a material impact on our capital resources or liquidity.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements, in conformity with GAAP, requires
management to make estimates, judgments, and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period, as well as the related disclosure of contingent assets and
liabilities at the date of the financial statements. On an ongoing
basis, management evaluates its estimates, judgments, and assumptions, and
bases
its estimates, judgments, and assumptions on historical experience, current
trends, and various other factors that are believed to be reasonable under
the
circumstances. Actual results may differ from these
estimates. See Note 1 to our consolidated financial statements
included in the 2006 Form 10-K for additional information about our accounting
policies.
The
estimates, judgments, and assumptions that have a higher degree of inherent
uncertainty and require the most significant judgments are outlined in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contained in our 2006 Form 10-K. Had we used estimates,
judgments, and assumptions different from any of those contained in our 2006
Form 10-K, our financial condition, results of operations, and liquidity for
the
current period may have been materially different from those
presented.
We
are
subject to market risk from exposure to changes in interest rates associated
with investments and borrowings under the 2004 Credit Agreement that we make
from time to time. We had no fixed rate long-term debt at November 3, 2007.
We
do not expect changes in interest rates in 2007 to have a material adverse
effect on our financial condition, results of operations, or liquidity; however,
there can be no assurances that interest rates will not materially change.
We do
not believe that a hypothetical adverse change of 10% in interest rates would
have a material adverse effect on our financial condition, results of
operations, or liquidity.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of
the
Exchange Act, as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have each concluded that such disclosure controls and
procedures were effective as of the end of the period covered by this
report.
Changes
in Internal Control over Financial Reporting
We
are in
the process of implementing a new point of sale register system in all of our
stores. We have approximately one-half of our 1,368 stores on the new
system in 2007 and we expect to complete the roll out to the remaining stores
in
2008. As of November 3, 2007, we have approximately 700 stores
operating the new system. The implementation of the new system
required us to modify our internal controls over financial reporting (as that
term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). There
were no other changes in our internal control over financial reporting that
occurred during the third quarter of 2007 that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
No
response is required under Item 103 of Regulation S-K. For a discussion of
certain litigated matters, see Note 7 to the accompanying consolidated financial
statements.
There
were no material changes to the risk factors as disclosed in our 2006 Form
10-K.
The
following table sets forth information regarding our repurchase of our common
shares during the third quarter of 2007:
Issuer
Purchases of Equity Securities
(In
thousands, except price per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
(a)
Total Number of Shares Purchased
|
(1) |
|
(b)
Average Price Paid per Share
|
(2) |
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Plans or
Programs
|
|
|
(d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under
the
Plans or Programs
|
|
August
5, 2007 - September 1, 2007
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
$ |
271,270
|
|
September
2, 2007 - September 29, 2007
|
|
|
214
|
|
|
|
28.02
|
|
|
|
214
|
|
|
|
265,263
|
|
September
30, 2007 - November 3, 2007
|
|
|
5,888
|
|
|
|
25.01
|
|
|
|
5,888
|
|
|
|
118,035
|
|
Total
|
|
|
6,102
|
|
|
$ |
25.11
|
|
|
|
6,102
|
|
|
$ |
118,035
|
|
|
(1)
|
On
March 9, 2007, we announced that our Board of Directors authorized
the
repurchase of up to $600.0 million of our common shares commencing
upon
authorization and continuing until exhausted. We purchased approximately
6,102,000 common shares through open market transactions during the
third
quarter of 2007 pursuant to this
program.
|
|
(2)
|
The
average price paid per share for open market purchases includes a
per
share commission paid to the executing
broker/dealer.
|
None.
None.
None.
Exhibits
marked with an asterisk (*) are filed herewith.
Exhibit
No.
|
Document
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated:
December 10, 2007
|
BIG
LOTS, INC.
|
|
By:
/s/ Joe R. Cooper
|
|
|
|
Joe
R. Cooper
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer, Principal Accounting Officer and Duly Authorized
Officer)
|
23